Monday Kitcommentary – Lookout the Outlook

Precious metals trading in New York opened with declines across the board this morning as a stronger US dollar and fast-falling crude oil conspired to motivate profit-takers to do just that.

The moves came on the heels of fresh record achievements in gold and silver amid heavy speculation late last week as well as during the overnight hours yesterday. Spot gold started the new trading week with a loss of $5.6 per ounce quoted at $1,480.80 per ounce while silver fell $33 cents to open at the $42.72 per ounce price marker.

All of that "profit-taking" was only manifest until the S&P rating agency slammed the US rating outlook with the "negative" label. Albeit the US’ sterling AAA rating remains in place, the shift from "stable" to "negative" in the outlook gave the markets an instant shudder of fear/greed and helped propel gold to within $1.80 of the $1,500 headline-making price level. It now appears that the profit-takers will have their hands full battling the profit-seekers in the wake of the S&P news. Volatility will not be in short supply, as was evidenced by the duration of the nearly $10 spike in gold this morning: roughly ten minutes. By 9:30 NY time gold was only ahead $2.50 per ounce. The onus is now on the Fed and on Capitol Hill to prove the S&P incorrect.

Platinum and palladium dropped by double-digits with the former losing $12 to ease to the $1,777.00 level and the latter slipping $20 to open at the $745.00 per ounce bid quote. Rhodium remained unchanged at $2,300.00 the ounce. In the background the US dollar gained 0.44 on the trade-weighted index to rise to the 75.38 level while crude oil was down $1.68 to $107.98 per barrel following Saudi statements that the market is in an "oversupply" condition.

Saudi Arabia has helped offset the drop in supplies resulting from the Libyan turmoil and said that there is "plenty [of oil] left" to cover the decline in Libyan exports. Over in Nigeria, President Goodluck Jonathan appears to be having…good luck as he is one step closer to re-election and such an outcome might also ease apprehensions about that country’s ability to keep the oil market adequately supplied. Nigeria is Africa’s largest oil producer.

Speculators in gold reduced their net long positions just a tad last week, following three weeks of consecutive gains in such positions. There was a notable increase in the amount of short positions in silver however, a development that has raised expectations of a correction being imminent in the white metals. Net long positions in platinum and palladium experienced gains during the latest reporting period while the combination of speculative activity amid ample inventory lists in crude oil is making for conditions that might witness a sharp turn-about in black gold, at any moment.

This morning, the US dollar was seen as benefiting from the woes of the euro. The latter fell victim to fresh speculative selling in the wake of rumors [later denied] that Greece was seeking a debt restructuring deal with the EU. The common currency lost half a percent against the greenback in the wake of a win by the anti-bailout "True Finns" party in Finland on Sunday, and then it proceeded to lose almost another half a percent when the Greek rumors started to make the rounds among currency traders. Technicians have pointed to repeated failures of the euro at $1.45 on the charts and have also pointed to the oversold condition of the US currency in recent trading sessions as a potential pivot point in the markets.

The greenback might also receive a helping hand this week from comments that were made by Treasury Secretary Geithner regarding GOP cooperation signals on the issue of raising the US’ debt limit. Appearing on NBC’s "Meet the Press" yesterday, Mr. Geithner stated that he was in possession of assurances from the Republican leadership that the current debt limit ($14.3 trillion) will be lifted when it reaches its maximum by no later than the 16th of May. Thus, emphatic declarations of an imminent US default and attendant demise of the dollar will once again have to be placed into deep-freeze by alarmist newsletter producers. For the moment, the dollar’s buyers might have to contend with the no-so-hot S&P outlook.

The weekend brought us a further tightening of bank reserve requirements by Chinese authorities. The on-going anti-inflation combat in the country pushed reserve ratios half a point higher, to a record level of 20.5% effective on the 21st of the month. The move represented the potential precursor to a fifth interest rate hike by the PBOC; one that might come as early as next month. The latest rise in China’s foreign exchange reserves -to the $3 trillion mark- is underscoring the excess of cash present in the world’s second largest economy.

The PBOC has publicly stated that it aims to "remove the monetary factors that are related to inflation." The G-20 summit over the weekend brought assurances that certain economies will now face a more intense level of peer review of their economic and monetary policies in a concerted effort to avert the unraveling of the emergent global economic recovery. The G-20 represent-in aggregate-85 percent of the world’s economy, while seven nations among the group each contribute more than 5% to the group’s cumulative GDP. The aforementioned policy focus will most likely concentrate on the "too large to ignore" economic powerhouses of the US, Japan, France, Germany, the UK, and, of course, those of China and India.

Meanwhile, addressing some of the very imbalances that were identified during the Washington summit of the G-20, international commodity market regulators have announced plans to tighten their supervision of the markets under their jurisdiction even as they exculpated speculators (for the time being) of being responsible for causing painful price bubbles in certain sectors. Among the measures mentioned by the International Organization of Securities Commissions (IOSCO): giving regulators the power to "address" the provisions of existing contracts which produce "manipulative or disorderly conditions" and to "intervene" in the markets to prevent "abuse." Position reporting and additional transparency are also the IOSCO agenda but industry officials doubt that the organization’s proposals will all be enforced as hoped for.

The Financial Times reports this morning that "an end to global monetary easing is on the horizon" and that the US Fed will signal a termination of its asset purchase campaign when the end of June rolls around. That said, the FT also finds that the doves on the Fed’s team appear to be in no particular hurry to stray from keeping interest rates low beyond the end of the asset-buying timetable. Much depends on headline inflation and headline labor market statistics between now and that time of summer.

One item that is not subject to too much "depends on" type of speculation is the state of the US economic recovery. The National Association of Business Economics’ latest survey shows that higher US sales and higher US hiring are cementing the recovery of America’s economy. The NABE also found that there are signs of a buildup of inflationary pressures in the US as a result of higher materials costs. Wage pressures were not cited as a factor just yet.

Last week we pointed to the imminent Glencore IPO as (in the opinion of some analysts) signaling the top of the commodities’ boom. Today, Bloomberg characterized the "little-known" takeover bid for an Aussie mining firm by a Hong Kong limousine operator (!) as also being a sign of an impending top in commodities. The verdict, by a Melbourne-based market analyst:

"If you started to see a lot of these things happening, like people in China who had no experience whatsoever in mining stocks and were just looking to buy miners, then it sounds a bit like a tech boom."

Everyone knows how that boom ended just when the skies looked their brightest and when the "this time it’s different" slogans were at their loudest.